Certifications

September 26, 2007

Will Rogers and the Yield Curve

Regular readers of "A Dash" know that we encourage intellectual integrity and consistency. When one is watching the markets all of the time, the "pundit polka" (as we called it in Wisconsin) is easy to spot.

A helpful and regular commenter, Josh Stern, noted and found humorous my Will Rogers piece written for RealMoney a few days ago. With this scant encouragement, I promised to share it with readers of "A Dash."

The Comment

Will Rogers is well remembered for saying "...I never met a man I didn't like."

I found myself reminded of this as I read all of the criticisms of the Fed
and this week's rate cut. A guy in one of the Hollywood Squares on CNBC
this morning was complaining that the 10-year note has moved up 20 basis
points, "taking back half of the Fed rate cut."

Reality check: LIBOR (cited here on Columnist Conversation as a big credit market issue quite
recently) has declined nicely, the TED spread has come in, the prime rate
(important for business and also many home equity loans) is down 50 bps. While
the 10-year is up a bit, mortgage rates are not (as Gary D. Smith reported in
his excellent trading diary on RealMoney Silver). [Readers of "A Dash" know that Gary has been one of the hottest market observers for several years, and provides a lot of his thinking and data on his website, Between the Hedges].

The CNBC guy did not like 10-year rates over 5% (drag on stock
valuations and profits). He did not like them below 4.5% (shows panic, a flight
to quality). He did not like the yield curve when it was inverted (predicted
recession) and he does not like it now, since it is sloped "for the wrong
reasons."

This guy never saw a yield curve he liked. Aha! That is what made me think
of Will Rogers. He is the anti-Will. If an analyst is going to cite an
indicator, it should -- well -- indicate something! Both ways. Positive and
negative. I wish that the interviewers of such guests would hand over a piece of
paper and invite the expert to draw a bullish yield curve.

More wisdom from Will: "Heroing is one of the shortest-lived professions
there is."

Update

I got a couple of emails saying that mortgage rates had gone up slightly, although my research showed that it depended on the market and the lender. Mortgages trade with the ten-year, but those rates did not really decline on the "flight to quality" buying and they only bounced a little. The main point is how a pundit who is determined to be bearish can torture evidence to get the desired result.

Mark Hulbert noted the same thing in his column today. The research cited by many to push recession predictions into the 30-40% range would now imply about a 10% chance. He notes that those citing this indicator in the past have fallen silent. Quelle surprise!

Reader Challenge

Use the search function at your favorite investment blogs. Enter "inverted yield curve" to determine the blogger's prior position. Then watch for an update. We invite suggestions for other search terms to try.

While I do not think we're going into a recession and while I'm not particularly fond of the yield curve as an indicator, it would only be fair to say that in the past the yield curve had normalized by the time the recession had started. So those who DO believe in the yield curve indicator, are still consistent in saying the recession signal has been given.

Jeff,
I for one am looking forward to a world where the yield curve actually does. The flat yield curve for the last half dozen years is probably another factor for the recent credit meltdown. Now the masses can go back to buying high cost 30 yr. fixed mortgages and the more sophisticated or daring can flirt with the short end for a better yield.